Tax Exemptions and Incentives in Nigeria

Quick answer: Tax Exemptions and Incentives in Nigeria is a public legal-education guide. The correct legal step may depend on the facts, documents, location, timing, and current law, so readers should seek tailored legal advice before acting.

This article is provided for general legal education only and is not a substitute for advice on a specific matter.

TAXES EXEMPTIONS AND INCENTIVES IN NIGERIA

TAX INCENTIVES is granted by the government in order to encourage industrial investment in Nigeria

There are several incentives available in Nigeria to encourage foreign direct investment, one of which is the Pioneer Status Incentive (PSI). It is a profit-based tax incentive governed by the Industrial Development (Income Tax Relief) Act, Cap 17 Laws of the Federation of Nigeria, 2004 that has been established in line with the modern tax regimes as a means of attracting and boosting investment and economic development in the different sectors of the Nigerian economy.

The principle of pioneer status as a tax incentive is that companies in industries designated as pioneers are relieved from paying company income tax in their formative years to enable them to make a considerable profit for re-investment into the business. It is a tax holiday granted for five years (initial period of three years and renewable for additional two years) to qualifying industries that meet the criteria, from paying corporate income tax. Companies qualified for pioneer status also enjoy the benefits of exemption from 10% withholding tax on dividends paid out of business profits. The pioneer status is administered by the Nigerian Investment Promotion Commission (NIPC).

EXEMPTION OF PROFITS

Section 23(1) CITA: exempts the profits of the following companies from tax:

A. a statutory or registered friendly society, in so far as such profits are not derived from a trade or business carried on by such society;

B. a co-operative society registered under any enactment or law relating to co-operative societies;

C. engaged in ecclesiastical, charitable or educational activities of a public character;

D. formed for the purpose of promoting sporting activities;

being a trade union registered under the Trade Unions Act;

D. dividend distributed by Unit Trust;

E. a body corporate established by or under any Local Government Law or Edict in force in any State in Nigeria;

F. body corporate being a purchasing authority established by an enactment and empowered to acquire any commodity for export from Nigeria from the purchase and sale (whether for the purposes of export or otherwise) of that commodity;

G. company or any corporation established by the law of a State for the purpose of fostering the economic development of that State.

H. a company other than a Nigerian company which, but for this paragraph, would be chargeable to tax by reason solely of their being brought into or received in Nigeria;

I. dividend, interest, rent, or royalty derived by a company from a country outside Nigeria and brought into Nigeria through Government approved channels;

J. the interest on deposit accounts of a foreign non-resident company;

K. the interest on foreign currency domiciliary account in Nigeria;

dividend received from small companies in the manufacturing sector in the first five years of their operation;

L. dividend received from investments in wholly export-oriented businesses;

M. any Nigerian company in respect of goods exported from Nigeria;

N. a company whose supplies are exclusively inputs to the manufacturing of products for export; and

O.)a company established within an export processing zone or free trade zone.

DEDUCTION FOR RESEARCH AND DEVELOPMENT

Section 26 CITA provides for the purpose of ascertaining the profit or loss of any company for any period from any source chargeable with tax under this Act, there shall be a deduction, not exceeding an amount which is equal to 10% of the total profits of that company for that year as ascertained before any deduction is made under this section and Section 25 of CITA.

Companies and other organizations engaged in research and development activities for commercialization shall be allowed 20% investment tax credit on their qualifying expenditure for that purpose.

RECONSTRUCTION INVESTMENT ALLOWANCE

Section 32 CITA makes available to a company an investment allowance of 10% of the actual expenditure incurred on plant and equipment, in addition to an initial allowance under the Second Schedule of the Act.

RURAL INVESTMENT ALLOWANCE

Section 34 CITA provides that where a company incurs capital expenditure on the provision of facilities such as electricity, water or tarred road for the purpose of a trade or business, such company shall enjoy an additional allowance under the Second Schedule of CITA

ELIGIBILITY:

A. the company must be located at least 20 kilometres away from such facilities provided by the government

B. cannot be enjoyed if already enjoyed provision of Section 32: Reconstruction investment allowance;

C. allowance can only be applied against the profit of the year in which such investment (facility) was completed.

INVESTMENT TAX RELIEF

Sections 40 CITA provides that where a company has incurred an expenditure on electricity, water, tarred road or telephone for the purpose of a trade or business carried on by the company, the company shall be allowed an “investment tax relief”

ELIGIBILITY:

A.) the company must be located at least 20 kilometers away from such facilities provided by the government;

B.) the relief shall be for each year expenditure is incurred on each of such facilities;

C.) a company shall not be allowed to claim the investment tax relief for more than 3 years; and

the relief shall not be available to a company already granted the Pioneer Status.

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